Market Plunge Will Reveal A Hard Bottom – This Is the Pattern I Am Looking For

Posted 9:30 AM ET - The market is still searching for a bottom. The 200-day moving average has been holding until this morning. We are going to test major horizontal support at SPY $270 and that is also the low from two weeks ago. I'm expecting that level to hold and I feel we will see a selling climax today. Ideally, the bottom will fall out in the first two hours of trading and we will spend the rest of the day rebounding. That would be the type of hard bottom the traders are looking for. The last week in October and the first week in November are historically the two most bullish weeks of the year. Often, it's because the market is coming out of the deep trough. Earnings should be excellent this quarter. The "comps" from last year will still be easy to beat. Tariff concerns might be mentioned but no one knows if Trump is going to follow through on threats. Raw material costs are rising, but PPI has been relatively benign. Labor is the largest input cost and hourly wages only increased .2% in September. They were up .3% in August and this is still not a major headwind. With 7 million more job openings than workers, it will be an issue in future quarters. Domestic economic conditions are strong. I believe the Fed will soften its tone. Every Fed official says that they are not swayed by the market, but they are. As long as stocks were moving higher they were going to maintain their hawkish rhetoric and they were going to tighten until the market sent a warning sign. Swing traders should hold the SPY without a stop. I'm confident that at very least we will be able to get back to $278. At that level we can decide we want to do. Our actions will be determined by how quickly the market establishes a low and buy how far it rebounds from that level. I do have longer-term market concerns. US tightening has put upward pressure on global interest rates. Credit is my primary concern and we are seeing "hot spots" around the globe (Argentina, Pakistan, Turkey, Italy and Venezuela). There are many other countries that are experiencing currency devaluation. China’s shadow banking industry could be exposed if a prolonged trade war materializes. A trade war with China will impact corporate profits (supply disruptions and higher costs) and consumers will pay more for finished goods (inflationary). The US has been an oasis of economic strength. Other major countries are struggling with 1 to 2% growth rates. Emerging market P/E ratios are dramatically lower than US P/E ratios and the spread was at a 10-year high before this correction. At a forward P/E of 15.5 stocks are reasonably valued, but the "E" could be in trouble next year. This spread also demonstrates that expectations for emerging market growth are very low. If we don't get much of a year-end rally the market will struggle in 2019. Asset Managers are not going to stick their necks out ahead of the elections when they don't know how earnings season is going to play out. We will have an answer to both unknowns in two weeks. Day traders need to wait for an early low. If we bounce off of SPY $270 in the first two hours of trading and we quickly recover half of the losses, favor the long side. We need to see an early bounce, not one that takes all day to materialize. If stocks continue to drift lower after two hours of trading we will hit another air pocket. A 10% correction on the SPY would put us at $264. The QQQ will have corrected 10% if it hits the low from 2 weeks ago. I won't be playing the downside today. Option premiums will skyrocket and the opening move is dramatic. I don't want to get caught in a short squeeze. I will keep my powder dry and I will be watching for signs of a capitulation low. I want to scoop stocks at this level and I believe we are going to see a nice bounce into year-end. . .

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